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2 COMMENT An unlawful bet on the
euro By Gunnar Beck
The
European Stability Mechanism (ESM) is the
permanent rescue fund set up by the eurozone to
grant financial assistance to members of the
currency union in financial difficulty. The ESM's
share capital of 700 billion euros is provided by
all 17 eurozone countries in proportion to their
size, with Germany assuming the largest share and
France next. The German Constitutional Court is
expected to rule on the constitutionality of the
European Stability Mechanism (ESM), the eurozone's
permanent rescue fund, on 12 September. The ESM is
also subject to a legal challenge in the European
Court of Justice.
In a series of important
judgments over the last three years, the
constitutional court has made clear that there is
not much room left for further EU integration
under the existing German
Constitution and that any
further transfer of national powers to the EU,
including the government's scope for the further
grant of financial assistance to embattled
eurozone economies, would have to respect certain
core functions of national sovereignty - notably
the Bundestag's (the German parliament) budgetary
autonomy.
The Bundestag, the
constitutional court held, must remain free to
decide the overall burden of taxation within
Germany and EU membership must not place such
financial obligations on member states so as to
deprive the national parliaments of the ability to
control public expenditure. The court further
insisted on the need for parliamentary approval of
any further financial guarantees or assistance
granted by Germany, with approval by the
appropriate committee being sufficient in many
cases.
Chancellor Angela Merkel's
government has defended the ESM Treaty on the
basis that it would fix Germany's maximum
liability to 190 billion euros (US$240 billion),
and that the Bundestag would retain control over
the grant of further assistance. Either German
politicians have not read the treaty they have
signed or they do not understand its small print.
The ESM is plainly unlawful.
Article 8(5)
of the ESM Treaty limits the fund capital not to
its nominal value, which amounts to 700 billion
euros, but to its issue value. The ESM's board of
governors may decide that the issue value exceed
the nominal value (Article 8(2)). Thus, for
instance, if the board decides to issue most of
the fund's shares at a value of twice their
nominal value, the overall liability of the
eurozone members who are the shareholders would
double.
Article 25(2) states that if
members are jointly and severally liable to any
losses arising from loans made by the ESM. That
means that if one or more of the ESM members fail
to meet their agreed financial contributions, the
other members shall be liable for the shortfall.
That situation is already a reality, because
Greece and Portugal are effectively unable to make
any contribution. Spain may be next.
Article 21 further authorizes the ESM to
borrow on the capital markets, from banks or other
financial institutions presumably which would
include the European Central Bank (ECB). There is
no overall borrowing limit. The ESM effectively
provides for the possibility of monetary state
financing through the ECB. ESM member states shall
again be jointly and severally liable for all
losses that may be incurred on loans that cannot
be repaid.
To be precise, according to
Annex I of the ESM Treaty Germany is liable for
27.15% of any losses on the ESM's share capital,
for 27.15% of any losses on the potentially
unlimited bonds issued by the ESM, for 27.15% of
ECB state credits channeled via the ESM, and, in
addition, for any shortfall resulting from any
failure to meet its capital payments and/or
liabilities by any insolvent ESM member, again
according to its contribution key of 27.15% and
well beyond that if several members become
insolvent.
Contrary to the position of the
German government, the ESM does not contain any
limit on the extent of any member state's overall
liability. If the ESM governors issue shares in
excess of their nominal value, issue bonds or
borrow from the ECB, and only one or two states
become insolvent or leave the eurozone, Germany's
exposure under the ESM may easily rise to 400
billion to 500 billion euros. If the crisis
worsens, Germany's likely ESM losses could exceed
700 billion euros. That would push up Germany's
public debt to 110% of GDP. Add to this Germany's
pre-existing loans and guarantees to the eurozone,
her potential liability for losses by the ECB and
her TARGET2 claims, which in the event of a
eurozone reconfiguration or total collapse would
have to be written off in total or in part, and we
are approaching a catastrophe that could no longer
be contained.
Other ESM provisions
reinforce the impression that the German
government is misleading the public. German MPs
are divided as to whether the ESM should be given
a banking license, and Chancellor Merkel openly
opposes the scheme. The discussion seems
superfluous. Article 32(9) states that the ESM
does not require a license as a credit institution
to borrow either on the financial markets or from
the ECB. It already has a banking license
qua law.
At the EU summit in late
June many commentators argued that the direct
bail-out of insolvent Italian and Spanish banks
would require an amendment of the ESM Treaty. In
truth, Article 19 of the ESM Treaty already allows
the ESM governors to extend the scope of the
fund's operations and bail out insolvent eurozone
banks, without need for treaty amendment.
Germany's constitutional court has stated
that the German government may not grant further
aid without parliamentary approval. However,
Article 4(4) allows the ESM's governors to
authorize immediate financial assistance if the
Commission and the ECB decide circumstances
warrant it. For example, if Italy requests
emergency financial assistance because it cannot
afford to roll over its public debt, the German
ESM board member will either give his approval or
ask the Bundestag to authorize him to do so
without any parliamentary examination. Even if he
gives his approval without parliamentary backing
or consultation, he cannot be held accountable and
the ESM board of governors' decision will be final
and non-justiciable.
Article 32 states
that any decisions taken by governors are
non-justiciable and Article 35 grants any ESM
decision-maker full legal immunity beyond their
time in office. Article 34 further requires all
present and former ESM officials, governors and
directors to observe absolute professional secrecy
in relation to any matter relating to the ESM.
Like the ECB president, ESM officials cannot be
taken to account for any violation of their
mandate or any violations of national
constitutional or EU law.
Germany's
federal budget is about 350 billion euros. The ESM
would, on realistic assumptions, increase
Germany's exposure to losses in the weaker
eurozone economies by between one and a half and
twice the size of the federal budget. If Germany's
other potential liabilities as an ECB shareholder,
her additional aid to Greece, Ireland and Spain,
and her TARGET2 claims against other eurozone
central bankers are taken into, her total
exposure, based in part on figures by the Ifo
Institute in Munich, would presently reach a sum
equivalent to four times the size of the federal
budget. Even if only part of Germany's total
claims against other eurozone governments had to
be written off, the loss would run into hundreds
of billions and effectively extinguish the
Bundestag's financial room for maneuver - its
budgetary autonomy for a generation and beyond.
The ESM is not only patently in breach of
the German Constitution, it also violates every
relevant provision of the EU Treaties. Article 123
of the Treaty on the Functioning of the European
Union (TFEU) forbids the use of the printing press
to bankroll governments and public authorities,
makes it unlawful for them to borrow from the ECB
or the national central banks, and expressly
prohibits the sale of government bonds to the ECB.
The ESM would create a parallel 'bad bank' which
would be allowed to do everything the ECB is
ostensibly prevented from doing under the
Treaties: to buy government bonds directly, to
lend to national governments, to grant such loans
without any prescribed limit, and to rescue
insolvent banks. Once the ESM runs out of money,
the ESM can borrow directly from the ECB which
will print the money.
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